Q1 2021 Hudson Pacific Properties Inc Earnings Call
[music].
Greetings and welcome to the Hudson Pacific Properties, Inc.
First quarter 2021 earnings conference call at this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
For anyone should require operator assistance during the conference. Please press star.
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As a reminder, this conference is being recorded.
Now my pleasure to introduce Laura Campbell Executive Vice President of Investor Relations and marketing. Thank you you may begin.
Thank you operator, good morning, everyone and welcome to Hudson Pacific properties first quarter 2021 earnings call.
Yesterday, our press release and supplemental were filed on an 8-K with the SEC are available on the investors section of our web site Hudson Pacific properties Dot Com, an audio webcast of this call will also be available for replay by phone over the next week on the investors section of our website.
During this call, we'll discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental will also be making forward looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings, including those associated with the COVID-19 pandemic.
Actual events could cause our results to differ materially from these forward looking statements, which we undertake no duty to update. Moreover, this quarter. We have once again included certain disclosures in response to the sets the interaction on the special disclosure of COVID-19 prompted business changes will not maintain this level of disclosure.
The operations normalize with that I'd like to welcome Victor Coleman, our chairman and CEO, Mark Lammas, our president of Art Suazo, our EVP of leasing I heard you Marianne our CFO Victor.
Laura.
Good morning, everyone and welcome to our first quarter 2021 call I'm pleased to start my remarks today by noting that lower case studies and increased vaccination availability or leading to positive momentum and the reopening of our U S markets and as of late April between 30% to 40% of eligible, California, and Washington residents are fully vaccinated.
With millions more having received their first dose vaccinations are moving a bit more slowly in British Columbia, but over a third of the population.
Had at least one shot and we're hopeful a recent rise in cases, there will resolve swiftly.
Many of our large tech and media tenants are leading the way in terms of getting their employees back to the office, Google Amazon Netflix, Microsoft Facebook and Uber all plan to bring employees back before or by at least the end of the summer.
These companies led the work from home movement at the outset of the pandemic and their return will serve as the impetus for other companies use of call employees back and we certainly anticipate our physical occupancy will increase meaningfully over the next two quarters.
Bottom line, our focus on tech and media for the centers positions.
Extraordinarily well for the next phase and beyond our markets remain at the center of gravity for these industries, which has flourished through this through the pandemic venture capital investing surge for the first quarter to nearly $70 billion.
Shattering previous records IPO activity remains very strong and recruiters anticipate significant tech hiring.
We're seeing similar trends immediate Netflix alone plans to spend $17 billion on content in 2021 versus 12 billion last year and collectively streaming companies Netflix Amazon Disney Apple among others are projected to spend approximately $112 billion on content Inc.
Sure there's plenty of capital for these companies to growth.
We've also spent the last decade building and repurposing of assets to create premier work environments that are perfectly suited to a post COVID-19 world.
We're at the forefront of the movement, the prioritized health and wellness sustainability technology and in particular experience from award winning innovative developments in Hollywood like epic to our re imagined creative office campus in San Jose like Gateway, our portfolio already delivers precisely what tenants want and need.
They contemplate a return to office, we remain focused on growth as we have been throughout the pandemic.
We're evaluating multiple mostly off market opportunities and several on the studio side, but also some of our office portfolio as well.
Of course, our existing sunset platform, our experience in operating and redevelop the production facilities not to mention our recent hire of the senior executive to head our global studios uniquely prepares us to create real estate value around demand and content and we're committed and aligned.
As even where as ever with our partner of Blackstone in this endeavor for.
Finally, I'm going to mention that on Earth day, We released our 2020 corporate responsibility report, marking the second such report, we published under our better blueprint platform.
Clearly established ourselves as an ESG leader in our industry with bold and impactful initiatives, which in 2020 include becoming 100% carbon neutral pledging to $20 million to address homelessness and launching a comprehensive companywide D. I training program. We also received numerous accolades for this year.
Such as Greg vs Green Star and five Star designations energy Star partner of the year and being named a U S Department of energy Green lease leader.
And a growth and a globe Street best of place work.
Our 'twenty one 2021 priorities include reducing our embodied carbon moving towards net zero waste and strengthening our D. I commitment on multiple fronts.
I'll look forward to sharing more of this important work as it them for fall and with that I'm going to turn it over to Mark for more comments.
More than a year into the pandemic, our tenants continue to pay rent.
We're also now successfully collecting both previously deferred and delinquent rents and additional request for relief, mostly from our smaller retail tenants are dissipating.
This is all the occurring despite california's ongoing eviction, moratoriums and renter protections, which are among the strongest in the nation.
In the first quarter, we collected 98 per cent of our combined contractual rents.
The of 99% from office tenants, 100% from studio tenants and 54% from storefront retail tenants.
April collections are tracking above these levels.
In the first quarter, we also successfully collected over 99% of the deferred rents, which we became due during the quarter. This trend is so far of consistent for April.
About 70% of the 80 or so of tenants that we're three or more months delinquent between April and the end of Q1 are either fully repaid or have commenced repayment.
This equates to nearly 75 per cent of past due rents from these tenants being repaid.
In the second quarter of last year at the height of the pandemic. We received about 150 rent relief requests from tenants occupying nearly 750000 square feet.
By comparison in Q1 of this year, we received only about 30 requests from tenants occupying around 175000 square feet again. These are mostly smaller retail tenants.
All in all we're very pleased with how collections are trending.
Turning to our development pipeline.
Construction of one Westside continues unabated and we're on track to deliver this fully pre leased 584000 square foot project to Google in the first quarter 2022, potentially even sooner.
We have another $3 2 million square feet of potential future development studio related opportunities in Los Angeles comprise over 40% with the balance being more pure play office across our core markets.
The most likely near term project, it's our Washington 1000 development in Seattle.
We anticipate the podium.
We'll be delivered two of sometime in the fourth quarter of this year. We of 12 months thereafter to decide whether to start construction on the tower, which will allow for better line of sight on post pandemic market conditions. Once construction has started we can deliver within 18 months.
And now I'll turn the call over the art. Thanks.
Thanks, Mark touring activity and tenant requirements of continue to increase as companies begin to formalize their post pandemic real estate strategies in most of our markets requirements are up 20% to 30% percent since year end. Although this is yet to translate into significant deal volume, we expect both signed leases and fewer opportunistic sublease lithium.
To begin to rightsize vacancy and overall.
Of the availability rate in the coming quarters.
We signed the 524000 square feet of deals in the first quarter, that's essentially double our leasing activity over the past five quarters and on par with our long term average quarterly quarterly leasing activity, our GAAP and cash rent spreads were 12, 2% and two 4% respectively.
Now to put the two 4% in the context, we had two large renewals in Palo Alto with Google and Lockheed the collectively comprised almost 50% of our first quarter activity. Those deals were essentially at market and thus significantly weighed on our cash rent spreads and remember of Palo Alto wins remain among the highest in our portfolio and in the ne.
<unk> despite COVID-19 we all.
Also had a 35000 square foot expansion lease executed in the first quarter, the contractual rent for which was slightly below market normalized for these as well as short term deals are cash rent spreads would have been closer to 7%.
Again in line with what we're seeing throughout our markets. Our current leasing pipeline that is deals and leases loi's or proposal stands at about one 3 million square feet, that's up close to 20% since our last call and back in line with our long term average pipeline.
After addressing several of our larger 2021 explorations, we're down to six 5% of our ABR remaining to expire this year right now we have roughly 40% coverage on those deals which are approximately 15% below market.
I'll also note that despite the challenging conditions across our markets for the 2021 explorations we've addressed during the first quarter, we renewed our backfill for close to 70% and now I'll turn the call over to Howard.
Thanks Art and the first quarter, we generated <unk>, excluding specified items of 48 cents per diluted share compared to 54 cents per diluted.
Share a year ago.
The first quarter of specified items in 2021 consisted of.
A one time prior periods supplemental property tax expense related to icon, Q and sunset Bronson of about $1 $1 million or <unk>.
<unk> per diluted share.
<unk> transaction related expenses of.
$1 million or zero cents per diluted share and a onetime straight line rent reserve of $2 6 million or two cents per diluted share a year ago.
First quarter NOI at our 43 consolidated same store office properties decreased three 7% on a GAAP basis and increased two 6% on a cash basis adjusting for the onetime supplemental property tax expense, an icon and cue NOI.
For our same store properties would have decreased by two 9% on a GAAP basis and increased.
The three 6% on a cash basis.
For our three same store studio properties NOI increased four 1% on a GAAP basis, and six 4% on the cash basis adjusting for the onetime supplemental property tax expense at Sunset Bronson NOI for our same store studio of properties would have increased by five 2% on the GAAP basis and.
Seven 5% on a cash basis.
In the first quarter, we repurchased 600000 shares of common stock at an average price of.
$23 32 per share.
With 1 billion in liquidity, we still have plenty of capital to pursue growth opportunities and run our existing portfolio. We have no material maturities until 2023, but for the loans secured by of Hollywood media portfolio, which matures in Q3, 'twenty 'twenty two and has three one year extension options are.
The average loan term.
It is five five years.
In the first quarter, our <unk> continued to grow increasing by 3 million or six per 1% compared to Q1 'twenty the.
The skirt, even while <unk> declined.
By $9 4 million for the same period again this positive <unk> trend.
Reflects the significant impact of normalized lease cost and cash rent commencements on major leases following the burn off of free rent.
We're providing guidance for Q2 2021 <unk> of 46 to 48 cents per diluted share excluding specified items at the midpoint. This is <unk> <unk> per share lower than our Q1 2021 <unk> per diluted share excluding specified items.
This decrease in Q2 compared to Q1 2021 is primarily driven by the following.
At one point, a one five per cent decrease in office GAAP NOI, resulting from prior period rent collections would you not to expect to reoccur.
And 19% decrease in studio GAAP, NOI, primarily due to seasonally adjusted lower production activity.
70 per cent decrease in G&A.
One per cent decrease in interest expense due to additional capitalized interest associated with incremental development spending and finally, a 7% decrease in <unk> attributable to Noncontrolling interest in terms.
Of estimating full year 2021 of <unk>.
The 47 cents per share in Q2, 2021 guidance midpoint and the underlying components just outlined provide a useful annual the annualized run rate except for the following full year adjustments of.
Office GAAP NOI.
As expected to be five.
0.5% higher shoot of GAAP NOI nine point.
The euro per cent of higher interest expense, 1% lower and finally <unk> attributable to Noncontrolling interest will be 3% higher and now I'll turn the call over to Victor.
The route as we head into the third quarter, we're very optimistic that the positive trends, we're seeing in terms of the vaccine the reopening of our markets and tenants' desire to return to office will continue.
At Hudson Pacific, we're poised to outperform in a recovery due to our exposure to the dynamic tech and the industries are high quality growth oriented tenants in our well located premier and modern portfolio inclusive of our unique ability to operate and Redeveloped studio assets.
We're well capitalized and focused on growth both through our existing development pipeline and the pursuit of new office and studio opportunities and I look forward to sharing more on all of these fronts in the coming quarters as always I want to express my appreciation for the entire Hudson Pacific team for their excellent work and dedication and thank you Ed.
The one for listening in today. We appreciate your continued support stay healthy and safe and we look forward to updating you next quarter operator. Please open the line for questions.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Craig Mailman with Keybanc capital markets. Please proceed with your questions.
Hey, guys.
Consistent with everyone else. It seems like your your leasing pipeline is on the upswing here could you just talk about what trends you're seeing from the space planning or density of standpoint.
Standpoint, if there's really any changes going on relative to pre COVID-19.
Hey, Greg, It's Victor I'll start and a lot of art jump in Okay, I hope, you're well listen I think for most of baseline of standpoint, what we're finding is.
Exactly what youre hearing from everybody else density is increasing.
We're seeing.
Less people and more space I do think that the.
Jury is still out on candidly on the hot desking doesn't seem to be very popular right now.
It looks like more open space or of office space that has.
Room for.
The conference facilities and the likes of that seems to be the in demand.
And as a result, you know tenants are looking to get input from their own employees as to what makes them comfortable this is going to evolve obviously, it's not going to be a permanent situation is going to be one size fits all lots of companies are looking at different alternatives, but right now it seems that the majority of the space that we currently have either.
Coming back to the market based on rolling rents rolling tenants for the space that we're bringing out the market. It's been very popular and a lot less capital dollars of them had to put into it that we thought are sure I'd like to add to that hi, Craig.
The the arbiter of award I think it is evolving and it's a very fluid situation I think nobody I don't think anywhere we've seen somebody pull a permit and say gosh, we're going to really rethink.
We think our space, that's not happening, but what we are seeing is.
The solutions in the interim our.
The furniture systems right, providing more.
For a more flexible solution to whatever their where their needs are so that as this does evolve. They can can really densify the space if need be and so again, we haven't seen people pulling permits and doing the hard hard construction on the.
Net on that basis.
I think I just wanted to add debt.
No that's really helpful and Victor your comment that you're seeing less ti than you thought you would what do you think of driving that.
Well I'll tell you I tore just this week I actually went to one of our newer properties yet because Netflix is just starting to move in and they're just as our chips. The systems that you've put in place because they've been building that space out ready to be occupied since summer of last year and now they're ready to go in there moving people in it.
What would what is a six person area.
A desk space area for six people they've converted three and so they've left the desk, but they've spread people out so.
On a system basis, I think those dollars are already put in place and they haven't moved furniture around in terms of redoing Ti for capital dollars on space. They just haven't changed and that's this is a brand new building and I think we're seeing that throughout the entire portfolio people are not spending the money and they are using the optimal space. They have because it's a lot more open air.
Space, that's what creative office space, what's right you've always heard me say what was the definition of creative office space with more people in less space now.
<unk> is going to be less people and more space. So it's the inverse of that yes, I'd like to add to that Craig you know all of our second generation space, we've been talking about our VSP program for a long time, and it's basically put us in the position where were situated to capture.
The demand with really a moving ready moving ready space kind of fresher moving ready space, it's highly monetized and so when tenants are coming to that space of spending fewer ti dollars, because we built it with flexibility in mind and so that's really helped us and it's going to continue to help us as tenants re <unk>.
The age in the market and you start to see more and more of demand is going to be space ready to go and we feel comfortable.
In that situation.
Alright that makes sense of just two quick follow ups you guys. Dell EMC is obviously, giving back some space you had other space, giving back of $5 five as well, what's the prospects to get that re tenant is kind of what do you think downtime it looks like at that asset.
Yes. So the first one you're talking about is qual tricks was on the top floor, where we're already in negotiations on that on that space on the three floors just to be clear.
The LNP had for Florida of giving back three we're left with about 45000 square feet.
The three floors in question, we have about 125000 square feet of active prospects in that end.
Yeah, that's chiefly because the increase in active deals in the pipeline that are in the market in Seattle has probably picked up about 25% to 30% just a quarter over quarter and so we're very optimistic that's great space.
Oh, okay.
The more items and the mark on that the all of that space was leased about the same types of the the mark on that space for for quality, Texas.
North of 50%.
North of 55 zero.
Yes.
Five zero of yes, yes, I'm sorry.
And then just last one company three the distinction of hardware, but the also space in Santa Monica non.
Necessarily.
Close to each other or are they two different uses or could they look to give back the Santa Monica space for that no buyers. It's just totally totally different use they're not giving back cinemark.
Alright, great. Thank you.
Thanks, Craig.
Thank you our next questions come from the line of Manny Korchman with Citi. Please proceed with your questions.
Hey, thanks.
For the comments on the <unk> guidance and how to think about the full year given those comments why not just come out with our full year <unk> guidance sort.
Sort of any let me, let me jump in because because we've talked about this multiple times, we can't come out with full guidance and I don't want to continue to repeat ourselves when we don't have tenant fully in the assets. So we don't we have a massive number that's variable around parking and.
After hours HBC and aspects around that that we just it's such a huge number that you guys keep asking the same question, we keep giving the same answer when the buildings are populated if it becomes a lot easier to come up with the numbers. There's no gaming here. Its process of just why I give you a number that we're just going to come back on in a month or two from now when.
People come in in June July August September that's the that's the reality of it Theres no gaming here.
Victor I hear you at the same time, you've now given or hopefully we're closer to you having some idea of one of those tenants are coming back and so with that as the baseline I thought that you would have given or could have given a number that was closer to where youre going to end up if nothing else changes from where we go from here and then you could provide the same guardrails around that.
The same way you said Hey look this is our our <unk>. If you think about that for the rest of the year. This is where we get.
We're getting closer to its I hope, having some kind of.
More secured floating on when people get back and so I think that's what's up in the next question.
Not the five day.
The facts around that but let's be candid, we have some of our larger tenants youre, saying the Canadian June summer coming in September of some saying theyre not coming till the end of the year. So it's not it's not yet and the other way and I. Just mentioned I was just over at Netflix and they say they are not coming in until until September, but yet people who are in the space right now so it's really a <unk>.
All of being day to day. This is not like a absolute finite timeline that people are saying September one we're all coming in we're hopeful of people will be in by then but it's been moving around.
Keep on just the active at this point of companies keep on either refining or adjusting the dates that they have previously said they'd come back so it's hard to determine but ultimately if.
If you listened to the I'll go back and look at the prepared remarks, we've given you the guardrails for the end of the year.
The the math is all there we just have an outset what guidance will be at the end of the year yeah. Yeah. So it's like 90% there and why not the rest of 10% because of the uncertainty and many of I mean, I think you of a very sound baseline to work from with the guide.
Sky The Guardrails said parade of outlines in his prepared remarks, and youll get to a number or should be able to get to our number pretty readily the only difference will be the very you.
You know uncertainties that Victor mentioned, namely that that variable income right and I mean, you know so.
You can.
Think of that as sort of upside if we if the buildings populate quicker and parking resumes and visitors come back in then you'll see more of that variable income come through quicker.
And you can just build it off of that baseline that <unk>, giving you the formula for.
Okay.
And then thanks for turning to your comments on acquisitions.
Sounds like Youre pretty well along the way there.
Maybe just close and as the how long you've been working on those and.
Anything you might've changed throughout the course of of the pandemic in those deals.
I think listen we're very confident there's going to be a series of acquisitions that we're going to be executing on.
We're further along than others, it's taken longer.
For a whole host of reasons, but not none the less and the fact that people are not in full time and it has not it has not changed our energy level, nor desire to complete these acquisitions. So yes. We are we are poised very well for acquisitions and I think I.
I think in the interim a few months coming you're going to hear youre going to hear from us on them.
Thanks, everyone.
Thanks Manny.
Thank you our next questions come from the line of Frank Lee with BMO capital markets. Please proceed with your questions.
Hi, Good morning, everyone. Just a follow up on your comment on the Seattle market you mentioned, the Dell downsizing in the call tricks, but it looks like nuance also moved out of.
Do you have a sense of where these smaller tech tenants are going or are they deciding they don't need of space anymore.
I was just curious is this more company specific or a more broader thing that's impacting the pioneer square submarket.
So all of those tenants are all larger tenants.
Frank So new loans had been sublease of the Quadrex, it's essentially quadrex, taking taking their space.
And moving actually Quadrex moving into about 200000 square feet at two when you. So the outgrew the space and Dell we knew about obviously.
And that was just the downsize within the other.
Theres really no other small tech tenants.
We're dealing with right now in that pioneer square market.
Okay. Thanks for clarifying.
And then a question on the studio business.
Seen a number of increasing amount of headlines on the new potential developments retail conversion opportunities and even new entrants into the market.
Just curious if we're at a point, where new supply could be an issue or what do you think the 112 billion of content spend you talked about COVID-19.
The demand.
Well, we're not even close to the new supply being an issue I mean, there's a lot of people are talking about the cdos and whether the executed on them or are they don't it's to be determined but there's a there's a high demand.
For South state space.
In multiple locations in the country and not the least of which are in our own backyard. So we're not concerned about the supply at this stage.
Okay, great. Thank you.
Thank you. Our next question is coming from the line of Jamie Feldman with Bank of America. Please proceed with your questions.
Great. Thanks, Hi, everyone.
I mean, I guess art just to talk more about the leasing pipeline. The one 3 million square feet can you talk about like what markets that in the markets. Those are in and any kind of anything that you can point out in terms of how the different submarkets reacting.
Sure I'll start I'll start with the first one which is.
The pipeline $1 three it's really distributed across what you might think where we have vacancy.
And roll.
Almost right up and down.
The portfolio.
The the markets there.
Sales I would say that we're starting to see of we've seen kind of in the quarter.
Significant uptick in Seattle, the top three really Seattle, San Francisco and Silicon Valley.
The others have.
Call It 10 to 10% to 15% kind of increase in there in their active deals in the pipeline, but those three in particular.
Very encouraged by it by the uptick in activity and it's mostly generated by like Tech.
I will say that the valley, we're starting to see more of an uptick from previous levels in professional service firms with tech is still driving it.
Okay. Thank you. So if you look at your kind of quarter over quarter percent leased you had the biggest decline in Seattle and the Bay area.
Can you talk like does that match up pretty well with those debt.
The incremental vacancy or the that incremental.
Yes.
How should we think Oh, sorry go ahead.
To answer the first question first the debt.
The lines up with it.
Some of these known Vacates.
Or early terminations, we've been out in front of.
From a marketing perspective, and so we have active prospects for a lot of that space.
Currently.
Okay. That's helpful. And then so how do you think about the either.
The percent leased or occupancy trajectory I guess, what's in the <unk> guidance and then how do you guys think about.
The rest of the year given the I assume at this point of you have a pretty good sense of move ins for move outs.
Yeah, Hey, Jamie its mark we'd spend a fair amount of time last night, making sure we could kind of give you some context around that Q4 for Q1 sequential decline and it popped up in a fair number of the early notes.
What are you what the sequential decline implies from US square footage amount is about 260000 square feet of rollout.
Over the quarter.
<unk>.
We had about 540000 square feet of exploration in the quarter.
What you might notice on the lease activity page is 144000 of early termination now that's unusually high.
In all of last year, we had 118000 feet of early termination in the last quarter of Q4, we only had 12000 square feet. So the first quarter saw an.
An unusually high amount of early termination. These were not unexpected early terminations. They were tenants that we had been struggling with for throughout the pandemic in most cases, we werent, even getting ramped from them. The biggest of which was no tell at 625 second and we finally.
We werent getting rent and we finally, just got the space back from them and we're doing what we can to recover against that we also lost 27000 feet with free jazz and then we had had and I'm not going to name names, but a law firm for 20000 feet, which we were sort of embroiled in a drawn out disagreement with it.
For the first quarter of those.
The feeding those through in what will prove to be an unusually high amount of early terminations, which we do not expect to see throughout the remainder of the year. If you adjust for that and sort of normalized early terminations, what you'd really expect to see.
About maybe 90 basis points of.
Rollout, which is about a call. It a 130000 fee as opposed to the $2 60 that we witness now that would be of 130000 feet in a quarter that sort of 540000 feet of exploration. So an unusually high quarter of explorations matched with an unusually high.
The amount of early terminations.
I'm going to stop short of trying to pinpoint for you what that implies in terms of where the 91 seven let's say an in service depending on what metric do you Wanna point point of view, but I'm going to stop short of trying to pinpoint where that ends up on the year, but I can say this.
I think it's fair to expect that we're not going to continue to see anything like 180 basis points of sequential.
Down checking lease percentages throughout the balance of the year.
Mark can I add to that.
It is important are the really decide what mark just said.
Our sequential drop was in line with our peers, but I think it's more noticeably if you look back year over year that is the state throughout the pandemic and you look at our lease percentage over this past year.
It certainly is for a more favorable I think than our peers euro on the year over year basis for share.
Yeah.
Okay. Thank you that's helpful. So is there an occupancy number.
<unk> and the two of your guidance.
But we didn't guide to an occupancy number now okay.
Okay.
Great. Thank you and then just a couple of more.
I guess the first question people have been asking about it.
Victor any interest in the tracking stock for the studio business.
Just kind of hot topic lately, yeah, I think listen we've.
<unk> talked about that.
Our growth patterns around that business, if it's something that we'll I think we'll revisit as we continue to grow that portfolio and platform of Blackstone.
Okay, but nothing imminent.
Okay, and then last a little nitpicky, but the.
The NFL lease.
Is there an update on the plans there or is it their exploration.
Their exploration is at 23.
We've had a.
We've engaged in the brokerage company.
For some time, we've got some very good activity on that space by a couple of single tenant users.
It's great space and we also have.
An additional.
Plan that we are looking at that would cause that would cause it to be completely redeveloped. So.
We've got we've got opportunities on it but we've got we definitely I'm from John go ahead of our yeah and to add to that yes. So their expiration at the end of 'twenty three to have an early term at the end of 'twenty two that they have to exercise in I believe September something like that they have to be up and running they have to run.
Both facilities at the same time and the ability to do that.
Remains to be seen right. So at this point.
Can't tell you with certainty that they're going to they're going to be out, but a word on the street is going to be up and running soon.
Wait and see all of that.
Okay, alright, thanks, everyone.
Yes.
Thank you. Our next question is come from the line of Dave Rodgers with Baird. Please proceed with your questions.
Yes, good morning out there maybe I'll start with you on the Palo Alto renewals that you talked about you guys made a point that those were obviously at market how much of that market change versus your expectation I guess were those always going to be above market or has the market moved I guess substantially against you in the last year or so just some color on that would be helpful. No absolutely kind.
Right on right on track I mean, those were the highest some of the highest rents in the country certainly the highest in our portfolio our expectation was really right on.
Okay. So I guess it take from that commentary that the market rent kind of net effect of Havent really moved that much against you relative to maybe where you were at the beginning of 'twenty I mean, just making sure I'm understanding your comments correctly, that's right that's absolutely right.
Okay.
On the 40% coverage, obviously Dell was the big one that we were all looking at anything else. That's upsize in there that maybe just doesn't qualify for the top tenant list that that's kind of on your watch list as you look for the rest of the year.
Yes, I mean, I guess the net the next biggest in line is absolute software.
In.
Vancouver.
Call of about 46000 square feet, we're in negotiation, where in the leases actually with them in a pretty pretty.
The healthy markets about a 40% Mark and then it drops off after it drops off after that and so again, it's we're in we're in discussions with there is some downside of discussions tenants are still trying to figure out how they're going to utilize the space and.
A lot of the explorations of kind of weighted towards the end of the year and they're all small tenants and so we're continuing to kind of hand to hand combat too to make sure. We can keep them in some capacity yeah, David Victor on Dell EMC. We knew this was coming we just didn't know how much. It was you know of various between what they took in and taking the lessor of.
More but they gave us a heads up way early on that they were downsizing because it's.
It wasn't of pioneer square Seattle play it was at Dell EMC play across the board for the country.
Got you yeah. Thank you for that and Victor on the studios can you kind of tell us where we're at in the studio recovery I know we've talked previously about maybe go into 24 hour shifts and getting business back you've given us some color with the the GAAP same store NOI expectations, but maybe just some added color around that.
Dave listen we are so I don't want to get into specific details, but we are seeing full product.
Production right now with the exception of obviously occupancy of office.
At its highest level right now and we're starting to see somewhat of an for route market of gauge just based on seasonality. Because this is the quarter. The there's typically been the low the slowest and so far we're not seeing that we've also just engage with two great tenants.
Signed new leases in sales stages with them in our portfolio that ex one extended for five years and one extended for two and so we're seeing the activity as high as it's been and from a production standpoint.
It is on location.
Sorry, It is unchallenged age location versus on location more but now we're seeing the on location shoots going so they are running greater than five days of week, which is which is what we thought would happen. So all of the benchmarks for the same as we anticipated it would be going and we're just hopeful that it's going to continue through the through this quarter and early next.
In the seasonality aspect and we have no reason to believe that it shouldnt that hence forth why our numbers were different this quarter than we anticipated on the studio side.
Yeah.
Great. That's helpful last maybe just for her route on the reversal of revenues can you give us a sense, what the cash and straight line impact word of this quarter from those reversals how meaningful they were.
Sure. It was actually almost all cash so it was tenants that have start to repay their rents.
In accordance with either repayment.
Agreements that we already have and it was about $2 6 million.
Alright, Thank you all.
Okay.
Thank you our next questions come from the line of NEC Yellow zone with Scotiabank. Please proceed with your question.
Thanks, Hi, everyone. So I just wanted to go back to the comment that I think art you made about the leases that are expiring this year being I think you said 15% of.
Hello, Mark in the I wasn't sure. If you mentioned that you're actually going to get a positive 15% releasing spread or what do you know for for recent the rest of this year or if you were talking about something else.
No that's exactly right Nick you got it exactly right.
Okay, Alright, and my second question. Then is also just going back to the pipeline I think he said of $1 3 million square feet a pipeline.
Just wanted to understand you know how we should think about.
Yes, historically, what type of conversion rate you got on that because I know, we're all trying to figure out where occupancies heading or at least the least of late in the portfolio and you do have just using what the full.
For the full not your share of number you have about a million square feet of explorations. This year and so I'm just trying to think about that $1 3 million versus the explorations.
And does this mean that you're just you're going to get a higher lease rate at some point this year or is it some sort of conversion rate on that $1 3 million pipeline.
Yeah, So that one 3 million square feet is skewed towards the renewal pipe with the.
Fuels for the remainder of the year of about 65%.
The answer is is that yes, I mean over historical levels, we've had about $1 three in the pipeline. So the good news is it started the pipeline sort of they get healthier and.
Of course, we always we always want more in the pipeline, but all of our conversion rate is always has been historically pretty good because we don't.
We define our pipeline is deals in the deepening of negotiations and so.
Versus others, who may include inquiries and tours and things like that so I feel pretty good about our conversion rate.
Okay. So just to be core sorry, the the pipeline does it.
Ted is mostly.
Weighted to renewal activity and so it would include when you were talking about the 40% coverage that's right.
On exploration, that's inclusive of that $1 3 million that's right.
Okay, Alright, thank you take care of everyone.
Hi, Nick.
Thank you our next questions come from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your questions.
Thanks, so much good afternoon.
I just wanted to maybe build on that or clarify the 40%.
Average comment basically are you, saying you have about 6% of the portfolio rolling and you're very confident about 40% and you're still negotiating with the rest of that how we should take it.
Yes, that's exactly right.
So I guess I'm I'm typically like at least so I would imagine that 40% and I'm, sorry, I'm getting granular I'm not trying to get like an occupancy number but I'd imagine like leases that are.
Like this quarter or next quarter, you probably have already made decisions right. It's more about the leaders in the fourth quarter that you are still debating.
Discussing the.
Third quarter, Yes, third line as I said third quarter and fourth quarter is heavily weighted a lot of those tenants. While the average tenant size is probably five to 6000 square feet.
And we're still in dialogue with them as they were trying to really figure out what their needs are.
So yes, that's a lot of lot needs to work itself out, but we're in active discussions with all of them right now.
Got it okay that makes sense.
If I look at the.
Uh huh.
The renewal of the spreads obviously were decent on the office side and the studio side.
You just mentioned you have 15% potential mark to market on the remainder of the role.
But if I just look at the incentives the speed the pis and the free rents.
To me at least it seemed like they ticked up versus kind of a.
Call of trailing full quarter of six quarter of whatever number you want to take I'm. Just wondering was there anything in the <unk>.
In the specific about the.
The needs of that where new lease the space and the three you talked about the new lease D. I anything specific about that debt would have caused it to jump up a little bit.
Yeah, Victor one of its mark absolutely.
I think it's important by the way.
To recognize that we're talking about 138000 square feet of leases. So it's not a large sample size to draw.
Brought to conclusion.
Conclusions out of.
Like you know our incentive costs going up and so forth, it's just not a big enough.
Amount of leaf as quite yet, but within that over half is the.
The lease we signed with a company three at Harlow, which is.
His first generation Ti space on a 12 year deal and so naturally it's going to have somewhat higher tenant improvements those came in at 85 Bucks and leasing commissions will be on the high side too. So those were 27 Bucks a foot and that's again that's over half of the 138000 feet. If you simply remove that deal.
Your your your new lease incentive costs dropped to 72 Bucks a foot from the 92 Bucks a foot, which is actually below the per square foot of total running through full year 2020.
There's also a few other anomalies there is a little bit more than 13000 square feet that we did on VSP space and.
When the VSP spaces.
Total gotten redo space.
And tends to come out of bid on the high side on T eyes on the weighted average Ti in the VA that 13000 square feet of DSP is 119 of for it. So when you further adjust for that all of the remaining new space actually jobs, the 58 Bucks.
The square foot compared to the 92 reported at which is like 20 bucks lower than the full year 'twenty per square foot average. So it really is just a byproduct of the what the composition of that 138000 square feet is and not worth.
Thinking of as a trend or some sort of indication that incentives are on the rise.
Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
The thing that's still.
Good morning out there.
So first just wanted to go back to Manny's question on guidance Victor I'm, not asking for a guidance range, but as we think about the components that go in there that are the variables.
There's the cash payments you know that either from tenants who are on a cash basis, who are paying for the catch up of rents that are owed. So one just curious where we stand on quantifying that and then two you mentioned variable items like parking or after hours of utilities or things like that I imagine the grip.
It's in there although it sounds like the studios are pretty well for production. So you know I've got some of that were seeing all of the extras on that but just curious what are the variables like as we think about quantifying how much from the from the cash rent side and then how much are we still missing on parking after hours of utilities et cetera.
Well, let me tackle the second one for the parking out of hours viewed.
<unk> I think we've been pretty consist of saying it's about two pennies.
A quarter of that that's still negatively impacted so there's upside there that we haven't.
<unk> seen yet right. So assuming tenants come back sooner that number will be in a number of sooner if they continuing delay that number will continue to be delayed so that one of its pretty straight for the cash rents. Those are more temporary we had a large amount the happened to happen this quarter, which was a big surprise, but.
We don't anticipate having these big chunks on of Gulfport basis. There just got a couple of very specific tenants with.
Pacific.
The negotiations happening that that helped us collect that so and then finally to your point, yes, the studio revenue can be pretty variable.
The upside this quarter.
I think we've built in from that momentum and the numbers that we provided but you know.
That could go either way again, depending on the activity and anything else that can change result, as the result of COVID-19.
Alex if I could just add to the comment about the cash rent collections.
As <unk> points out we had some unusually high repayments.
That'll be really onetime repayments because they were catch up if you look at the amounts that we collected of previously deferred rents over the quarter. The total collected is in the neighborhood of.
200.
Call. It 250000, so of the two six.
We are not a lot of it is made up of previously contractually deferred catch ups, we collected 99% of what we would do in terms of deferred rent, but it's not you shouldn't look at that as the.
The the the absence of what that big cash catch up was.
It was important but it wasn't the majority of the anywhere close of the majority of it.
So just in some of it sounds like the two pennies of the parking.
And after hours it sounds like that's the biggest piece right.
Yes, yes, okay. So in other words as we're thinking about our model and earnings the cash impacts from rent collections is minimal obviously the studios is going to be what it is but really the missing link. If you will is that two pennies a quarter right.
Through all the disclosures and comment that Mark made in the past in terms of our collections that would be expected right. We've been collecting 90 790, 899% of our rents. So therefore, the deferred amount isn't going to be that much just based upon that math.
Right and the retail stuff that's out like whatever 50 per cent that is I guess de minimis in the scheme of things, yes. At this point of retail is only two 2% of ABR right. So I mean for collecting 50 per cent of it which we are it's about 1%.
Second question is one west side, obviously, you guys are getting close to opening it delivering it a year from now in the first quarter 'twenty two.
The Victor I'm sure you don't like negotiating publicly on the phone, but still just curious is that something that we should think about of buyout occurring before the project is delivered or that is something that.
If if it does happen would be something after first quarter 'twenty two after it gets delivered.
Well, let me say it this way.
Alex.
There is no.
There is no trigger on of buyout until its stabilized and so unless unless we.
<unk> Mais rich go to each other.
Offered up in the other party agrees so.
I would say I would say, it's safe to say that the conversations are fluid and.
There is more than just the two of us interested in that piece.
I can tell you we're not selling rfps so.
I would I would think that.
But the interesting sounds like it could be a JV or something like that but helpful. Victor listen. Thank you very much. Thanks P. J.
Thank you. Our next question is coming from the line of Venkat comment any with Mizuho. Please proceed with your questions.
Hi, good morning on the.
The city of segment in terms of marketing and trying to pre lease the new developments at Sunset Gower and.
Our tenants differentiating between the development is timing of delivery of the main factor or are there some nuances to those stages that are catering to different production needs.
Well I think listen I think the differentiation of it's based on demand and the demand right. Now is is is somewhat being fluid because candidly as we've mentioned before the production side has been has been up and running in full swing, but the office occupancy side has not and so until.
Some of these tenants figure out how much space they really need.
And the density aspects that we talked about.
It's going to be based upon.
The their interest.
One need to and most importantly delivery and I think.
That seems to be the.
The hidden.
The aspect of it nobody seems to talk about which is fully entitled projects or a lot better off than those who are just publicly saying hey, we're going to come out and build the studio or we're going to build the office space in the studio without entitlements, we still live in probably the most total in total and constrained marketplace in the country and these things do not happen quickly so regardless.
Of of where the conversations are with us relative to the tenant demand.
Still positioned extremely well because we are fully entitled and both projects.
Great. Thank you and one for all of it.
It looks like kind of straight line rent above below market rents kind of ticked up sequentially about $8 million after declining for the past four quarters was that primarily driven by the acquisition of 1918, eight or was there something else contributing that.
A few items.
Thank you for that and a few items contributing about one is the acquisition of 1918 eight.
Just because of the below market nature of that asset. The second is you know a lot of our leases have.
And then just coincidentally a lot of free rent in the first quarter and sort of straight line rent typically ticks up as a result of that.
And so and so that's the reason of the for the inquiries.
Great. Thank you.
Thank you. Our next question is come from of the line of Daniel.
Green Street. Please proceed with your questions.
Great Victor you mentioned changing density.
<unk> a few times throughout the call I'm, just curious and I know this is a difficult question to answer but what do you think current density is in your portfolio now and what do you think we may be trending to.
Well right now.
It's nothing right.
For all but yes.
You mean going back to when we were fully occupied pre pandemic Daniel I think it was probably somewhere in the.
It could be as low as 150 to 175 feet per and I think we're talking about on average and I could be low $2 50, So it's a 40% increase.
And it may be more but yes, that's sort of the number of that people were talking about the us specifically as I said, you know I've been touring some of our space for people are getting ready to occupy and it is like that.
It's half of what it.
What it was.
I do think that's the that's the.
That's the major upside where people were not looking at office the way they should be about where the future is.
Everybody is talking about a massive increase in employment.
Specifically of move around and we know our tenants.
The largest ones the Amazon Netflix.
Google are all looking to employ thousands of people in our markets alone.
In order to put those people in the space. They currently have they're going to need more space right and so that's where the upside is going to be.
And then on the leasing activity are you hearing any trend or any trends of tenants trading up.
Say post COVID-19 from class B to higher quality buildings, yes, Danielle I mentioned this the last quarter. We are seen in the art intimated a little bit on the professional tenants.
Typically we have not seen a lot of professional tenants coming through the portfolio. We've got a couple of full floor users specifically law firms that are looking to.
In leases with now in the valley and they are moving up and they're moving from east to Asia, and we're seeing that because of the opportunity in certain marketplaces in certain asset classes that.
Art is high wrenches they work.
I am not sure sure Thats merit enough for a trend.
But clearly it will it will attract people, who maybe otherwise never had the opportunity to attract.
And just last one for me you mentioned being in the process of the closing of a few acquisitions.
I'm just curious on the studio side, what are you currently underwriting for Unlevered returns.
The for studios I believe you mentioned you say on the development side having.
Having mid Sevens the high eights type returns of what does that look like on the new acquisition for us.
Unlevered or levered.
You said Unlevered, yes, I mean, I think we're looking at.
Stabilize.
Seven.
And generally the.
Presumably this comes with some development upside too I would guess, yes and economies.
Got it thanks Victor thank.
Thank you.
Yeah.
Thank you. Our next question is coming from the line of Rich Anderson with Smbs, Inc. Please proceed with your questions. Thanks for hanging in with me can now good afternoon.
So just to make sure.
I heard I got this right when you laid out the guidance for the second quarter should we start with just sort of backing out the $2 6 million in the second quarter and then grow from there or is that the right way to think about it.
Yeah.
If you heard of $2 6 million of of the one time no. We just try to keep it as simple as possible. If you start off with our reported numbers and make the adjustments that I provided.
I'll get you to what we think Q2 may look like.
Okay.
Okay, but that was the one time kind of event right. Maybe I'm just maybe you can take that offline I won't get into too much granular detail on that that is true. It's the one time, but again, that's when we gave the number of if you factor that in.
Okay. Okay, Okay understood Alright, and then a question for Victor on the on the <unk>.
Strategy to grow studios I, just got off the call earlier today, where there was supposed to be of deal, but COVID-19 kind of completely different asset class. The COVID-19 kind of disrupted the negotiation and buyer and seller could no longer come together and I am wondering if.
Is that kind of it's been happening in the studio space had you probably been able to close and stuff to this point had it not been for the pandemic and perhaps seller.
Just couldnt come to a number with you because of the of these unknown factors does that is that is it fair to say that it's been kind of disruptive early on in terms of your ability to grow the studio from here studio business from here.
I wouldn't say, so now rich I think listen the things, we've just taken a little longer I don't think its been based upon disruption around the pandemic I think it has been based upon people actually being integrated fully up and running and ready to go and that did take some time and that was of six to 12 month process, but the activities pretty much normalized now and and.
The markets are pretty fluid in terms of the debate asking and what sellers and buyers are interested in doing so.
Whatever potential slow process I think is behind us.
Okay. It sounds good thanks, thanks rich.
Thank you there are no further questions at this time I would like to turn the call back over to Victor Coleman for any closing remarks, I appreciate everybody's participation and questions and.
Once again I want to thank the enormous effort of the entire Hudson Pacific team and his dedication to making this company. What it is today, so everybody be safe and we will talk to you next quarter. Thanks, so much operator.
Thank you. Thank you for your participation of this does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.